Business context and reporting period
This is Stellar Biotechnologies, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2019, covering its fiscal second quarter and first six months of fiscal 2019. Despite the request metadata identifying Edesa Biotech, the filing issuer is Stellar (Nasdaq: SBOT). Stellar produced and sold keyhole limpet hemocyanin (KLH) for biotechnology, pharmaceutical, academic and clinical-research customers.
On March 7, 2019, Stellar agreed to acquire privately held Edesa Biotech in a share exchange, subject to conditions including Stellar shareholder approval. After closing, existing Stellar shareholders were expected to hold about 10% of the combined company and Edesa shareholders and option holders about 90%, subject to a working-capital adjustment. Stellar planned to change its name to Edesa Biotech Inc. following closing.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | 2019: $117,755; 2018: $64,052 | 2019: $170,788; 2018: $84,539 |
| Operating expenses | 2019: $1.80 million; 2018: $1.41 million | 2019: $3.26 million; 2018: $2.82 million |
| Operating loss | 2019: $1.68 million; 2018: $1.34 million | 2019: $3.09 million; 2018: $2.73 million |
| Net loss | 2019: $1.66 million; 2018: $1.35 million | 2019: $3.06 million; 2018: $2.75 million |
| Loss per share, basic and diluted | 2019: $0.31; 2018: $0.90 | 2019: $0.57; 2018: $1.83 |
- Six-month gross profit, calculated as revenue less cost of sales, was approximately $78,000, or 45.9% of revenue; the comparable 2018 gross profit was approximately $16,000, or 19.0%. Management attributed the quarterly stability in cost of sales despite higher sales to higher margins on clinical-grade KLH.
- Six-month operating cash use was $2.53 million, similar to $2.53 million in the prior-year period. Investing activities provided $6.01 million, primarily from $6.10 million in proceeds from sales and maturities of short-term investments. Cash and cash equivalents increased to $7.68 million from $4.23 million at September 30, 2018.
- At March 31, 2019, total assets were $9.15 million, current liabilities $881,000, working capital $7.26 million, and shareholders’ equity $8.27 million. The balance sheet showed no debt; short-term investments had been converted to cash and cash equivalents.
- Accumulated deficit was $53.49 million. The filing reports no off-balance-sheet arrangements with a material current or future effect.
Material changes versus the prior comparable period
- Six-month revenue more than doubled, primarily from increased sales of higher-value clinical-grade KLH. Sales remain variable with the progress of customers’ third-party clinical studies.
- Six-month net loss increased by about $309,000. General and administrative expense rose $756,000 to $2.21 million, principally because of legal and professional fees associated with the proposed Edesa transaction and public-company expenses.
- Research and development expense fell $279,000 to $846,000, mainly due to lower contracted research services and materials. Aquaculture costs fell $59,000 to $114,000, reflecting reduced testing and personnel costs and deferred purchases.
- Cash and cash equivalents rose, while short-term investments declined from $6.08 million to zero. Accounts payable and accrued liabilities increased to $801,000 from $493,000; the company also reported $80,000 of deferred revenue.
- Stellar agreed to sell its Mexican subsidiary, BioEstelar, for nominal consideration on March 29, 2019 rather than undertake a more costly wind-down. The filing includes a $19,000 loss on disposition in general and administrative expenses and approximately $32,000 of disposed leasehold improvements in research and development expense.
- Stellar and its joint-venture partner agreed to dissolve and liquidate Neostell; a roughly $30,000 impairment loss was included in six-month general and administrative expenses.
Outlook, risks and unusual items
- Management expected available cash, investments and product sales to fund operations for the next 12 months, and said it was conserving working capital while maintaining core activities. It may seek debt or equity financing. The filing gives no formal revenue or earnings guidance.
- Management expects further losses. If the Edesa exchange does not close and Stellar increases operations, the company warns it may need substantial additional funding and could have to curtail operations if capital is insufficient.
- Exchange risks include failure to obtain required approvals or satisfy closing conditions, transaction disruption and integration challenges, expected dilution of Stellar shareholders, possible termination fees, and transaction costs estimated at approximately $925,000 even if the transaction is not completed. A $1.0 million termination fee may apply in specified circumstances.
- The exchange ownership allocation may adjust based on Stellar’s working capital on the day before closing; the filing says adjustments may occur if working capital is above $3 million or below $2 million. Customer concentration is significant: one customer represented 80% of six-month revenue in 2019, and two customers accounted for 88% of receivables at March 31.
- Other risks include dependence on customer clinical development and demand for KLH, limited natural supply of the source mollusk, foreign-exchange exposure, and volatility in the share price. Management reported disclosure controls were effective as of March 31, 2019 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Edesa share exchange closed, its final ownership allocation and any working-capital adjustment, and the status of required shareholder and Nasdaq approvals.
- Cash runway and operating cash use, including whether the expected 12-month funding horizon remains valid after transaction costs and any change in operating plans.
- Customer concentration, KLH order trends and dependence of product sales on third-party clinical-study progress.
- Final costs or liabilities from the BioEstelar sale and Neostell dissolution, and any resulting obligations not clearly quantified in this filing.
- The company reported 5,330,715 common shares outstanding as of May 6, 2019; verify subsequent share issuance, dilution and the treatment of outstanding warrants and options.